September 2009 Legal Briefs

Creation of HPMLs and Requirements for Verification of Repayment Ability for HPMLs and HOEPA Loans

New Escrow Requirement for HPMLs Effective for Applications Received on or after April 1, 2010 (October 1, 2010 for Manufactured Homes)

Restrictions on Prepayment Penalties for HPMLs and HOEPA Loans Effective 10/1/2009

Revisions to HMDA (Reg C) Incorporate Reg Z’s Addition of HPMLs Effective 10/1/2009

New Appraisal-Related Amendments Effective 10/1/2009

New Mortgage Servicing Practices Effective 10/1/2009

New Advertising Restrictions Affecting Closed-End Credit Loans Effective 10/1/2009

S.A.F.E. Act Redux
 

Byron’s Quick Hit for October 1 Reg Z and Reg C Changes:
 We have known big changes affecting the Truth In Lending Act (“TILA”) were coming for several months now.  Some of the changes were effective on July 31, 2009, as detailed in the July Legal Briefs.  Now most of the remaining changes to Reg Z are upon us.  This article will review the new requirements of Reg Z, which become effective October 1, 2009, along with a corresponding change to Reg C.

 The largest change effective October 1 is a new definition created by Reg Z for “Higher-Priced Mortgage Loans” (“HPMLs”).  These changes are effective for loan applications received on or after October 1, 2009.  Although these loans are dubbed “higher priced” and were intended to affect subprime loans, as discussed below, the APR limits that qualify as HPMLs are not very high, and these regulations are likely to affect most lenders.  These revisions to Reg Z described below generally provide for:

1. Verification of a borrower’s repayment ability for HPMLs and for loans that are already subject to the Home Ownership and Equity Protection Act (“HOEPA”).  NOTE:  These changes will seriously undermine lenders’ ability to make balloon notes that come due in less than seven years;
2. A new requirement that escrow accounts be established for HPMLs.  This requirement is effective for applications received on or after April 1, 2010, or October 1, 2010 in the case of manufactured housing;
3. Restrictions on prepayment penalties for HPMLs and HOEPA loans;
4. A new prohibition on coercing or affecting appraisals on home loans;
5. New requirements for the posting of mortgage payments;
6. New restrictions on advertising for all closed-end credit applications (not just home loans); and
7. Revision of restrictions on advertising for HELOCs.

In addition, for banks that are subject to HMDA reporting, Reg C is being revised to replace the older “rate spread” reporting requirement with reporting on HPMLs instead.  This change will be effective for credit applications received on or after October 1, 2009.

Creation of HPMLs and Requirements for Verification of Repayment Ability for HPMLs and HOEPA Loans 

 New changes to Reg Z create a new classification of “higher-priced mortgage loans” (“HPMLs”) and are intended to address what was considered to have become a common practice of making subprime loans without a real review of a borrower’s ability to repay.  Unfortunately, what the new Reg Z defines as “subprime” will likely affect many traditional home mortgage loans made by Oklahoma banks.  The ultimate result will be that it will be much harder for Oklahoma banks to offer credit to many of its customers.  In addition, the use of balloon mortgage loans with a term of less than seven years will likely be effectively eliminated by the new changes to Reg Z.

Effective October 1, 2009, lenders who make HOEPA loans or HPMLs will be required to verify a borrower’s ability to repay each loan.  Although HOEPA loans and HPMLs have different definitions, the new verification of repayment requirements are the same in each case.  Under the current interest rate environment, it is more likely that a refinance transaction will be considered an HPML than a HOEPA loan.  However, qualification under these two regimes is done separately and it is conceivable that a loan may be both an HPML and a HOEPA loan.

HOEPA Loans
 HOEPA is the acronym used for the Home Ownership and Equity Protection Act of 1994.  HOEPA restrictions only relate to residential mortgage REFINANCE transactions with high interest rates, as loans that are for the purpose of the acquisition or initial construction of a residence, reverse mortgage transactions and open-end mortgage transactions (HELOCs) are specifically exempted.  A refinance transaction will be subject to HOEPA if either (i) the annual rate of interest exceeds the yield on U.S. Treasury securities having a comparable maturity to the term of the loan by 8% for a first mortgage or 10% for subordinate liens, OR (ii) for which total points and fees on the loan will exceed the greater of 8% of the total loan amount or $583 in 2009 (this number is indexed for inflation annually).  See generally, 12 C.F.R. § 226.32.  U.S. Treasury securities information can be located at:  http://www.federalreserve.gov/releases/h15/update/.  By way of example, as of August 31, 2009, the applicable fixed U.S. Treasury having a 10-year maturity was at 3.4%.  Thus, a loan would not be subject to HOEPA restrictions in the case of a 10-year mortgage of the same date unless it exceeded 11.4% in the case of a first mortgage or 13.4% in the case of a second mortgage.

Higher-Priced Mortgage Loans
  The revisions to Reg Z define a new loan category, under 12 C.F.R. § 226.35.  An HPML is any consumer credit transaction secured by the customer’s principal dwelling (NOTE: a dwelling can include a mobile home, recreational vehicle or even a boat) with an interest rate that exceeds the “average prime offer rate for a comparable transaction as of the date the interest rate is set” by 1.5% or more for a first lien, or by 3.5% or more for a subordinate lien.  The “average prime offer rate” will be published by the Federal Reserve Board weekly.  The FRB table can be located at:  http://www.ffiec.gov/ratespread/newcalc.aspx.  Like HOEPA, the HPML restrictions do not apply to (i) residential property that is not the borrower’s residence (e.g., rental property), (ii) reverse mortgages, or (iii) home equity lines of credit.  Unlike HOEPA, a loan for the purchase of a principal residence can be an HPML.

It appears that rate triggers for HPML coverage will be relatively low when compared to the rates triggering HOEPA coverage.  By way of example, as of August 31, 2009, the “average prime offer rate” published by the FRB for a fixed 10-year note was 5.78%.  Thus, for a loan rate lock made during the week following August 31, any 10-year first mortgage set at a rate of 7.28% or higher (or 9.28% or higher in the case of a second mortgage) would be considered an HPML.  Compare this result to the 11.4% and 13.4% triggers for HOEPA for the same term.  As of August 31, a 15-year fixed loan would be considered an HPML if its rate exceeded 6.19% for a first lien or 8.19% for a subordinate lien.

Requirements for Verification of Repayment Ability for HPMLs and HOEPA Loans
Loans that are subject to HOEPA have always been subject to a prohibition against a lender engaging in a “pattern or practice” of extending credit without regard to the consumer’s ability to repay.  However, the revisions to Reg Z have taken away the “pattern or practice” language, thus making a SINGLE INSTANCE of making a loan without verification of repayment ability a regulatory violation.  The basic new requirement in the case of both HOEPA loans and HPMLs is that lenders are now required to take reasonable steps to verify a borrower’s ability to repay a loan.  NOTE:  Specifically exempted from this new requirement are “bridge” loans with a term of 12 months or less.  See 12 C.F.R. §§ 226.34(a)(4)(v); 226.35(a)(3). 

The new language prohibits the extension of credit to a consumer “based on the value of the consumer’s collateral without regard to the consumer’s repayment ability as of consummation, including the consumer’s current and reasonably expected income, employment, assets other than collateral, current obligations and mortgage-related obligations.”  The term “mortgage related obligations” includes expected property taxes and any expected mortgage-related insurance required by the lender.

 The lender is specifically required to take steps to verify the customer’s repayment ability by: (1) verifying amounts of income or assets that the borrower relies upon to determine repayment ability by reviewing the applicant’s W-2s, tax returns, payroll receipts, financial institution records or other “reasonably reliable evidence” of income or assets; (2) verifying the consumer’s current obligations. 

 12 C.F.R. § 226.34(a)(4)(iii) provides an apparent “safe harbor.”  If a lender satisfies these requirements, it is presumed to have complied with the verification of repayment requirements.  The presumption applies if (1) the lender verifies income as provided above, (2) evaluates the borrower’s repayment ability using the largest payment (including escrow amounts) that will be required under the note in the first seven years following loan closing, and (3) the lender evaluates the loan using either a ratio of total debt to income or evaluating how much money the consumer will have left after paying all debt obligations.  Requirements (1) and (3) are pretty straightforward.  It could be presumed that prudent lenders would already have these procedures in place.  However, the provision for an evaluation of a borrower’s ability to make payments over at least 7 years throws the ability of lenders to make balloon loans with a term of less than 7 years into serious jeopardy.  It will also affect how ARM loans are evaluated.

 Presumption of Compliance or Requirement?  
 By its terms, the safe harbor provision at 12 C.F.R. § 226.34(a)(4)(ii)(B) creates a “presumption of compliance.”  It does not state that failure to fall within the safe harbor creates a presumption of violation.  This was a change from the rule as originally proposed.  The FRB specifically recognized this when it published the final rule, stating “The [proposed rule] provided that a failure to follow any one of several specified underwriting procedures would create a presumption of a violation.  In the final rule, those procedures … have instead been incorporated into a presumption of compliance…”  See 73 F.R. 44540.

 In this author’s opinion, this change from the original proposal to the final rule should be significant.  Specifically, it could be argued that a lender could comply with verification of the borrower’s ability to repay in the context of a 3 or 5 year balloon note, for example.  After all, there is nothing in the basic requirements that discusses loans with a term of less than 7 years at all. 

However, regulators have recently made statements indicating that they intend to treat the safe harbor provision as a requirement.  For example, in the FDIC’s Supervisory Insights, Vol. 6, Issue 1 (Summer 2009), the FDIC stated:

[W]here a balloon payment comes due before the end of seven years, the balloon payment must be considered in determining repayment ability, IN EFFECT, PROHIBITING HIGHER-PRICED MORTGAGE LOANS WITH BALLOON PAYMENTS DUE IN LESS THAN SEVEN YEARS IN ALMOST ALL CASES.  (Emphasis added).

 In contrast, the Official Staff Interpretations of the Federal Reserve Board addressing this issue seem to recognize that a presumption of violation does not arise by virtue of failing to meet the seven-year element of the safe-harbor, stating “If a creditor fails to follow one of the non-required procedures set forth in [12 C.F.R. § 226.34(a)(4)(iii)], then the creditor’s compliance is determined based on all the facts and circumstances without there being a presumption of either compliance or violation.”  Unfortunately, as set out below, the Staff Interpretations go on to give six specific examples, none of which deal with a balloon note of less than seven years.  Thus it is clear that no presumption of compliance is available for a HPML or a HOEPA loan with a balloon structure of less than seven years.

Examples (from 12 C.F.R. Pt. 226, Supp. 1):
i. Balloon-payment loan; fixed interest rate. A loan in an amount of $100,000 with a fixed interest rate of 8.0 percent (no points) has a 7-year term but is amortized over 30 years. The monthly payment scheduled for 7 years is $733 with a balloon payment of remaining principal due at the end of 7 years. The creditor will retain the presumption of compliance if it assesses repayment ability based on the payment of $733.

ii. Fixed-rate loan with interest-only payment for five years. A loan in an amount of $100,000 with a fixed interest rate of 8.0 percent (no points) has a 30-year term. The monthly payment of $667 scheduled for the first 5 years would cover only the interest due. After the fifth year, the scheduled payment would increase to $772, an amount that fully amortizes the principal balance over the remaining 25 years. The creditor will retain the presumption of compliance if it assesses repayment ability based on the payment of $772.

iii. Fixed-rate loan with interest-only payment for seven years. A loan in an amount of $100,000 with a fixed interest rate of 8.0 percent (no points) has a 30-year term. The monthly payment of $667 scheduled for the first 7 years would cover only the interest due. After the seventh year, the scheduled payment would increase to $793, an amount that fully amortizes the principal balance over the remaining 23 years. The creditor will retain the presumption of compliance if it assesses repayment ability based on the interest-only payment of $667.

iv. Variable-rate loan with discount for five years. A loan in an amount of $100,000 has a 30-year term. The loan agreement provides for a fixed interest rate of 7.0 percent for an initial period of 5 years. Accordingly, the payment scheduled for the first 5 years is $665. The agreement provides that, after 5 years, the interest rate will adjust each year based on a specified index and margin. As of consummation, the sum of the index value and margin (the fully-indexed rate) is 8.0 percent. Accordingly, the payment scheduled for the remaining 25 years is $727. The creditor will retain the presumption of compliance if it assesses repayment ability based on the payment of $727.

v. Variable-rate loan with discount for seven years. A loan in an amount of $100,000 has a 30-year term. The loan agreement provides for a fixed interest rate of 7.125 percent for an initial period of 7 years. Accordingly, the payment scheduled for the first 7 years is $674. After 7 years, the agreement provides that the interest rate will adjust each year based on a specified index and margin. As of consummation, the sum of the index value and margin (the fully-indexed rate) is 8.0 percent. Accordingly, the payment scheduled for the remaining years is $725. The creditor will retain the presumption of compliance if it assesses repayment ability based on the payment of $674.

vi. Step-rate loan. A loan in an amount of $100,000 has a 30-year term. The agreement provides that the interest rate will be 5 percent for two years, 6 percent for three years, and 7 percent thereafter. Accordingly, the payment amounts are $537 for two years, $597 for three years, and $654 thereafter. To retain the presumption of compliance, the creditor must assess repayment ability based on the payment of $654.

 Exclusions from Presumption of Compliance
 Even where you could otherwise satisfy all the requirements for the safe harbor provision, the new regulation provides that no presumption of compliance is available for the following:  (i) any transaction for which the principal of the loan will increase over the first seven years (e.g., a negative amortizing loan); (ii) a loan with a term of less than seven years that will not be fully amortized (e.g., a balloon note that is fully due in less than seven years).

 Treatment of ARM Loans
 When evaluating an ARM loan, a lender must first determine whether the loan is subject to HOEPA or an HPML.  Then, the lender must do the separate evaluation of repayment ability.  For HOEPA, simply use the initial interest rate as a starting point to evaluate whether the loan falls under HOEPA.  In evaluating whether an ARM is an HPML, there is a separate “average prime offer rate” table for ARM loans that evaluates an ARM based upon the length of time before a rate adjustment is possible under the loan.

 Once it is determined that an ARM is either subject to HOEPA or is an HPML, the evaluation of repayment ability test is the same for an ARM loan as for a fixed loan.  In order to come within the safe harbor provision, it is necessary to determine the borrower’s maximum payment possible over the first seven years of the loan.  So long as the lender determines that the borrower can make such a payment, the safe harbor may apply.

 Application of New Rules to Loan Renewals and Assumptions
 What if you simply have an existing loan that comes up for renewal or is assumed as allowed under the original loan documents?  In almost all cases, you must treat either of these instances as a new extension of credit and evaluate under the new provisions of Reg Z.  Because a loan “renewal” is at your option, it is a new extension of credit.  Whether a renewal or an assumption by a new primary obligor, it is considered a new transaction under Reg Z.

New Escrow Requirement for HPMLs Effective for Applications Received on or after April 1, 2010 (October 1, 2010 for Manufactured Homes)

Many banks are very concerned about the new escrow requirements for HPMLs.  As discussed above, most financial institutions have made loans that if they were made after 10/1/2009 would be considered an HPML.  Fortunately, the new escrow requirements only apply for loan applications received on or after April 1, 2010.  The one exception to this delayed implementation relates to loans secured by manufactured housing, which go into effect on 10/1/2010.  Reg Z does not specifically define “manufactured housing.”  Under HUD’s Reg X it is generally considered to be housing that is ready for occupancy when it leaves the factory.  

 Escrow requirements applicable under HPMLs only apply to first-mortgage liens.  A lender is prohibited from making an HPML secured by a first lien on a customer’s principal dwelling unless prior to making the loan an escrow account has been established for payment of property taxes and premiums for mortgage-related insurance required by the lender, or insurance protecting the lender against the consumer’s default or other credit loss (e.g., PMI). 

Even after April 1, 2010, the escrow requirements will not apply to co-ops.  In addition, escrow will not be required for property insurance for condominiums to the extent the condominium association is required to maintain common insurance for the condominium owners.

Restrictions on Prepayment Penalties for HPMLs and HOEPA Loans Effective 10/1/2009

Restrictions Applicable to HPMLs (12 C.F.R. § 226.35(b)(2))

 Effective 10/1/2009, Reg Z restricts the ability of lenders to place prepayment penalties upon the new category of HPMLs.  A prepayment penalty can be either (i) the traditional stated penalty for early payment of principal, or (ii) computing a refund of unearned interest in a manner that is less favorable to the borrower then the actuarial method. 

Reg Z prohibits prepayment penalties in the following situations: (1) in all cases after two years following consummation of the loan; (2) in any case where the source of the prepayment funds is a refinance by the original lender or an affiliate thereof; and (3) for any loan in which the principal and interest payment is subject to change during the first four years of the loan.

Restrictions Applicable to HOEPA Loans (12 C.F.R. § 226.32(d)(6) and (7))

There have always been restrictions on the ability to charge a prepayment penalty on HOEPA loans.  However, they are changing effective 10/1/2009.  These restrictions are the same three restrictions described above applicable to HPMLs, with one additional restriction:  no prepayment penalty may be charged if at the consummation of the loan the consumer’s total monthly debt payments (including the new mortgage amount) are in excess of 50% of the consumer’s monthly gross income (as verified pursuant to the repayment verification provisions above).  While many HPMLs are not also subject to HOEPA, if a loan is subject to HOEPA, this additional restriction will apply.  NOTE:  HOEPA can be triggered by the amount of points and fees charged, not just higher interest rates.

Revisions to HMDA (Reg C) Incorporate Reg Z’s Addition of HPMLs Effective 10/1/2009 

The Home Mortgage Disclosure Act (HMDA) was enacted in 1975 and requires some (but not all) depository institutions to collect, report to regulators, and disclose to the public data about originations and purchases of home mortgage loans (both home purchases and refinances) and home improvement loans, as well as loan applications that to not result in a loan being made.  Importantly, the current revisions to HMDA do not affect whether your bank is subject to HMDA reporting.  If you have been subject to HMDA reporting, you will continue to be.  If you haven’t been, you still are not.

 Since 2004, HMDA banks have been responsible to report loan price information.  Specifically, institutions have been required to report the difference between a loan’s APR and the yield on U.S. Treasury having a comparable maturity if the difference was more than 3.0% for a first-lien loan, or 5.0% for a subordinate-lien loan (the “Rate Spread”).  In light of the Federal Reserve’s creation of the new definition of “Higher-Priced Mortgage Loan,” the decision has been made to replace the Rate Spread, tied to U.S. Treasury, with the new HPML, tied to the same “average prime offer rate” and using the same rate spreads (1.5% or 3.5%).  Fortunately, this means that banks will not be tasked with calculating the old Rate Spread and HPML, except for the period between October 1 and January 1, 2010 (relating to loan applications that are received prior to October 1 that close prior to January 1).

 Banks should begin this HMDA reporting change with loan applications RECEIVED on October 1, 2009.  In addition, the new HPML reporting requirement will apply for all loans that close on or after January 1, 2010, regardless of when the application was received.  Thus, for loan applications received prior to October 1, but that close (or a final decision is made not to close) prior to January 1, 2010, such loans should be reported using the old Rate Spread.  NOTE:  Banks should not “jump the gun” and begin using the HPML formula for HMDA reporting prior to October 1.

New Appraisal-Related Amendments Effective 10/1/2009 

The new Reg Z amendments include a new section [12 C.F.R. § 226.36] that includes prohibitions on any attempt to coerce or affect an appraisal.  This prohibition on coercion ONLY applies to consumer loans secured by a consumer’s principal dwelling and does not apply to HELOCs.  Section 226.36 contains two main provisions relating to appraisals: (1) a prohibition on coercion of an appraiser; and (2) a prohibition on extensions of credit based upon coerced appraisals. 
Section 226.36 provides that a creditor or mortgage broker (or their respective employees or affiliates) are prohibited from directly or indirectly coercing, influencing, or otherwise encouraging an appraiser to misstate or misrepresent the value of the dwelling.  NOTE:  If your bank is in the practice of closing on loans which you never fund and close under the name of another lender, you are considered a mortgage broker for purposes of this section.  Section 226.36 gives several examples behavior that will and will not constitute prohibited coercion or influence under this provision.

Examples of Prohibited Conduct:
1. Implying to an appraiser that current or future retention of the appraiser depends on the amount at which the appraiser values a consumer’s principal dwelling;
2. Excluding an appraiser from consideration for future engagement because the appraiser reports a value of a consumer’s principal dwelling that does not meet or exceed a minimum threshold;
3. Telling an appraiser a minimum reported value of a consumer’s principal dwelling that is needed to approve the loan;
4. Failing to compensate an appraiser because the appraiser does not value a consumer’s principal dwelling at or above a certain amount; and
5. Conditioning an appraiser’s compensation on loan consummation.

Examples of Conduct that Do Not Violate This Section:
1. Asking an appraiser to consider additional information about a consumer’s principal dwelling or about comparable properties;
2. Requesting that an appraiser provide additional information about the basis for a valuation;
3. Requesting that an appraiser correct factual errors in a valuation;
4. Obtaining multiple appraisals of a consumer’s principal dwelling, so long as the creditor adheres to a policy of selecting the most reliable appraisal, rather than the appraisal that states the highest value;
5. Withholding compensation from an appraiser for breach of contract or substandard performance of services as provided by contract; and
6. Taking action permitted or required by applicable federal or state statute, regulation, or agency guidance.

New Mortgage Servicing Practices Effective 10/1/2009

 In addition to the coercion of appraiser prohibition, the new 12 C.F.R. § 226.36 also mandates certain mortgage servicing practices in connection with consumer credit transactions secured by a consumer’s principal dwelling, but does not apply to HELOCs.  The new servicing requirements include:
1. Servicers must credit payments as of the date of their receipt (unless the delay does not result in a late charge or negative credit information);
2. Servicers may not impose any late fee or delinquency charge in connection with a payment when the only delinquency is attributable to late fees or charges assessed on an earlier payment (no late fee pyramiding);
3. Servicers must provide a borrower or his representative an accurate payoff statement upon request “within a reasonable time.”  Per the staff comments, five business days will normally be a reasonable time.
Although Section 226.36(c)(2) provides that a servicer may specify in writing requirements for the consumer to follow in making payments, and delay crediting of payments for up to 5 days as a result, such requirements must be “reasonable” and what is reasonable is not defined.  Thus failure to abide by basic requirements of the rule is inviting a claim by a consumer.

New Advertising Restrictions Affecting Closed-End Credit Loans Effective 10/1/2009 

The revised Reg Z substantially overhauls advertising restrictions for both open-end and closed-end credit.  These restrictions apply to all extensions of credit, not just loans secured by a borrower’s dwelling.  Although in certain cases, there are different requirements if the credit is secured by the borrower’s dwelling.  These restrictions apply to all advertisements occurring on or after October 1.  The primary advertising restriction for both open-end and close-end credit is a general prohibition on stating specific credit terms in an advertisement that will not be actually offered or arranged by the creditor.  See 12 C.F.R. §§ 226.16(a) and 226.24(a).

New Clear and Conspicuous Standard for Closed-End Credit Advertisements
 The new provisions affecting closed-end credit provide a new “clear and conspicuous” standard for the credit advertised.  How these standards apply varies depending on whether the loan is secured by the borrowers dwelling and the medium of the advertisement. 

 In all cases, IF an advertisement states a rate of finance charge, the finance charge must be stated as an “annual percentage rate,” using that term.  In addition, if the APR can increase after the loan closes, that fact must be stated.  Stating any other rate in the advertisement is generally prohibited, except that a simple annual rate that applies to any unpaid balances may be stated as well (so long as it is not displayed more prominently than the APR).  See 12 C.F.R. § 226.24(c).

Disclosures Required If “Triggering Terms” Are Used
Also for all closed-end credit advertisements, the regulation has what are referred to as “TRIGGERING TERMS” as it relates to all advertisements of closed-end credit.  See 12 C.F.R. § 226.24(d)(1).  If an advertisement mentions ANY of (i) the amount or percentage of any required downpayment; (ii) the number of payments or period of repayment; (iii) the amount of any payment; or (iv) the amount of any finance charge, then the advertisement must state ALL of the following terms that apply: (a) the amount or percentage of the downpayment; (b) the terms of repayment reflecting the repayment obligations over the full term of the loan, including any balloon payment, and (c) the “annual percentage rate,” using that term, and if a rate may be later increased, that fact must be stated.

Special provisions apply for all closed-end advertisements that are contained in catalogs or other multiple-page advertisements or electronic advertisements, as contained at 12 C.F.R. § 226.24(e).  The special rule applies only if the advertisement contains one or more of the “triggering terms” described above.

Alternative Disclosures for Television or Radio Advertisement (12 C.F.R. § 226.24(g))
To the extent disclosures are triggered as described above, a clear and conspicuous disclosure in the context of visual text advertisements on television for credit secured by a dwelling means that the required disclosures are not obscured by techniques such as graphical displays, shading, coloration, or other devices, are displayed in a manner that allows a consumer to read the information required to be disclosed, and comply with all other requirements for clear and conspicuous disclosures.  For example, very fine print in a television advertisement would not meet the clear and conspicuous standard if consumers cannot see and read the information required to be disclosed.

A clear and conspicuous disclosure in the context of an oral advertisement for credit secured by a dwelling, whether by radio, television, or other medium, means that the required disclosures are given at a speed and volume sufficient for a consumer to hear and comprehend them. For example, information stated very rapidly at a low volume in a radio or television advertisement would not meet the clear and conspicuous standard if consumers cannot hear and comprehend the information required to be disclosed.

Additional Restrictions Applicable to Advertisement for Credit Secured by a Dwelling 
 Additional advertising requirements apply to advertisements for loans to be secured by a dwelling where more than one simple annual rate of interest will apply. An advertisement must contain a clear and conspicuous disclosure of each payment that will apply over the term of the loan.  These disclosures must be immediately next to or directly above or below the simple annual rate or payment amount (but not in a footnote) and should be in the same type size as the simple annual rate or payment amount.  Also, IF an advertisement states the amount of the payment, the regulation requires disclosure of the amounts and time periods of all payments that will apply over the term of the loan.  See (12 C.F.R. § 226.24(f).

Acts Specifically Prohibited for Advertisements for Credit Secured By a Dwelling (12 C.F.R. § 226.24(i))
The following are specifically prohibited for all advertisements for credit to be secured by a dwelling:
(1) Using the word “fixed” to refer to rates, payments or credit for variable-rate transactions or other transactions where the payment will increase, unless:
a. One of the following phrases is used BEFORE the first use of the word “fixed” and is at least as conspicuous as the use of the word “fixed”: (i) “Adjustable-Rate Mortgage” (ii) “Variable-Rate Mortgage” or “ARM”; and
b. Each use of the word “fixed” for a rate or payment is accompanied by an equally prominent and proximate statement of the time period for which the rate or payment is fixed, and the fact that the rate may vary or the payment may increase thereafter.
(2) Misleading comparisons in advertisements. Generally, it is prohibited to compare an advertised loan product to another hypothetical product. 
(3) Misrepresentations about government endorsement. A lender cannot offer products as part of “government loan program,” a government-supported loan” or as otherwise endorsed or sponsored by the federal, state or loan program UNLESS the advertisement is for an FHA loan, VA loan, or similar loan program that is in fact endorsed or sponsored by a government authority.
(4) Misleading use of the borrower’s current lender’s name.  Generally, an advertisement may not refer to the consumer’s current lender so as to make it look as if the advertisement comes from such lender.
(5) Misleading claims of debt elimination.  The prohibition against misleading claims of debt elimination or waiver or forgiveness does not apply to legitimate statements that the advertised product may reduce debt payments, consolidate debts, or shorten the term of the debt.
(6) Misleading use of the term “counselor.”  The term counselor may not be used in connection with an advertisement for a for-profit mortgage creditor.
(7) Misleading foreign-language advertisements.  If you use language that would trigger disclosures in Spanish (for example), you may not give the disclosures in English.

Disclosures Regarding Tax Implications for Credit Secured by Principal Dwelling (12 C.F.R. § 226.24(h)
 If an advertisement is for a loan secured by a consumer’s principal dwelling AND the advertisement states that an extension of credit may exceed the fair market value (“FMV”) of the dwelling, the advertisement must clearly and conspicuously state that (i) interest on the portion of credit exceeding the amount that is greater than the FMV of the dwelling is not tax deductible; and (ii) the consumer should consult a tax advisor for further information regarding the deductibility of interest and charges. 

Tweaking of Advertising Rules for HELOCs effective 10/1/2009
Although the changes in Reg Z advertising rule relate principally to closed-end loans, the final rule did tweak advertising rules for HELOCs. The major changes to 12 C.F.R. § 226.16 relate to the clear and conspicuous standard, the advertisement of promotional terms, and the advertisement of initial discounted and premium rates.

Promotional Rates and Payments
If a HELOC advertisement includes a promotional rate or payment amount, the advertisement must also include: (1) the period of time during which the promotional rate or payment will apply; and (2) information about the rate or payment that will apply after the promotional period. These must be listed in a clear and conspicuous manner with equal prominence and in close proximity to each listing of the promotional rate or payment.

Initial Discounted and Premium Rates
Under the rule, if an advertisement states a discounted or premium rate, it must also state the amount of time the rate will be in effect, and a reasonably current APR that would be in effect using the index and margin. Again, these must be stated with equal prominence and in close proximity to the advertised discounted or premium rate.

Television and Radio Ads
The final rule provides alternative disclosure options for radio and television HELOC advertisements that contain trigger terms. A radio/television HELOC ad that contains a trigger term may comply with the disclosure rules by providing APR information and a toll-free telephone number (or any number that allows the consumer to reverse charges) along with a reference that the consumer may call to obtain additional cost information.

 S.A.F.E. Mortgage Act Redux
 We continue to get a lot of questions about the Federal S.A.F.E. Act and Oklahoma’s S.A.F.E. Act, which were covered in the July Legal Brief.  Most bankers want to know if these Acts apply to their mortgage loan originators, and if so, what they need to do.  The short answer is:  Your mortgage loan originators (generally, those who make loan decisions) will be exempt from the Oklahoma S.A.F.E. Act because they work for you, a bank.  Thus, they will not have to comply with the more burdensome provisions of the Oklahoma Act, such as the requirement of 20 hours of training.  However, they will only be exempt if they register under the Federal S.A.F.E. Act as a mortgage loan originator.  At this time, the Feds are still working on finalizing a rule for registration requirements.  It is expected that the rule will be finalized soon.  Once the federal registry is available, those who are required to register will have six months to do so. The Nationwide Mortgage Licensing System can be accessed at:  www.stateregulatoryregistry.org.  We will publish an update when this system becomes available.